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OncoMed ; A Small Cap Biotech Tech With High Trading Potential

|About: OncoMed Pharmaceuticals, Inc (OMED), Includes: CELG
Summary

OncoMed is a Busted IPO that was mis-managed by its former CEO.

The company has a strong potentially high valued partnership with Celgene.

With a market cap under $125M, the potential for large short and mid-term return is very high in our opinion.

Oncomed (OMED) develops cancer stem cell (CSC) and immuno-oncology therapeutics.

The company has hit a rough patch over the past few years and became a 'busted IPO.'

We feel this was largely driven by the misguided strategy of the prior CEO in focusing on the wrong assets under the Celgene (CELG) collaboration. They have had a wide variety of targets under its collaboration with Celgene, but of particular note are the TIGIT and to a lesser extent GITR assets.

The current TIGIT (Anti-Tigit antibody) deal (Opt-In) offers 50/50 rights,  + undisclosed double digit overseas royalties and $440M milestones per target to any developed program in the United State including the two aforementioned targets. Particularly the TIGIT target has the potential to be another major checkpoint inhibitor as broadly expressed as PD-1. 

TIGIT is an interesting target as it is expressed on CD8+ (effector) T-cells, T-regulatory cells, and NK cells particularly in exhausted phenotypes. Further it can bind to receptors on both dendritic and macrophages which prevents their maturation, potentially conferring immune tolerance in advanced tumors.

TIGIT+ T-reg cells are known to be rather dysfunctional in the tumor micro-environment and produce excessive IL-10 -- known to alter the polarity of macrophages towards immune tolerance. In addition these T-regs also induce TIM-3 expression -- a known fibrotic related checkpoint.

TIGIT+ effector T-cells on the other hand have significantly blunted activity lacking the ability to produce IL-2 and TNF-a. However, they still can produce IFN-gamma that contributes to inflammation, but without the other markers it lacks anti-tumor activity. Given this early evidence, we feel that TIGIT is largely underappreciated as a next generation checkpoint inhibitor. The company has had a significant repricing from the double digits now to under 3 per share following termination of earlier, less promising assets which we feel does not consider that these follow on assets, especially TIGIT hold far more promise.

Furthermore, the company has greatly reduced its burn rate, in which we feel the market has not caught on to as of yet. Today, after the bell the company announced that revenues were $38.2 million for the full year of 2017, an increase of $13.0 million , compared to $25.2 million in 2016. The increase in revenue was primarily due to an increase in amortization of upfront fees from our partnership with Celgene as a result of revision of estimated period of performance. Revenues were $20.6 million during the fourth quarter of 2017, an increase of $14.4 million , compared to $6.2 million for the same quarter in 2016.

Also, R&D expenses were $59.8 million for the full year of 2017, a decrease of $49.9 million , compared to $109.7 million in 2016. The decrease was primarily due to lower external research and development costs resulting from the discontinuation of dosing of all patients in our demcizumab and tarextumab programs and a decrease in internal costs due to reduced headcount following the restructuring actions in April 2017 . R&D expenses were $8.6 million for the fourth quarter of 2017, a decrease of $15.6 million , compared to $24.2 million for the same quarter in 2016.

Additionally, the company stated that as of January, the Board of Directors has retained an executive search firm and initiated a search for a Chief Executive Officer. The company also announced in January that Executive Vice President and Chief Financial Officer Sunil Patel has resigned effective March 9, 2018 . As a result of these executive changes, OncoMed named Perry Karsen as Executive Chairman of the Board of Directors and John Lewicki as President of OncoMed. The company plans to provide an update on the CEO search once a final decision has been made.

We see Oncomed as a highly discounted buying opportunity at its current market cap coming in under $125M. Oncomed has been cutting the 'fat' so-to-speak, and seem to be on a correct course now. The company's burn rate has come way down after cutting the fat, currently at $55M a year, without consideration of upside surprise in terms of Celgene's partnership.

We also note that strong institutions have strongly been buying up company shares. There are no warrants, and the company has $103M cash-in-hand (Basically, the company is trading at cash).

TIGIT could become a high-valued asset here, so we think at the very least, the company makes for a good upside trading opportunity. 

Disclosure: I am/we are long OMED.

Additional disclosure: Disclaimer: This article/video/blog is intended for informational and entertainment use only, and should not be construed as professional investment advice. They are my opinions only. Trading stocks is risky -- always be sure to know and understand your risk tolerance. You can incur substantial financial losses in any trade or investment. Always do your own due diligence before buying and selling any stock, and/or consult with a licensed financial adviser.